After a dramatic ending of their professional relationship and respective roles at PIMCO in 2014, Bill Gross (now at Janus) and Mohamed El-Erian (of PIMCO parent Allianz) have started off 2015 with a similar view on higher interest rates. But they had a different take on what the 0.2% drop in average wages means.
Speaking on Bloomberg radio early Friday, Gross said that the Federal Reserve may be concerned about the level of economic expansion that could tolerate an uptick in interest rates, given that wage growth improvements are trailing increases in U.S. employment.
When asked why the yield on the 10-year Treasury is low, “It’s about wages,” Gross replied. “The market is conflicted over what the Fed will do.”
Later, El-Erian spoke on Bloomberg TV about what the recent employment and wage figures mean for a possible hike in rates.
The Federal Reserve “is looking at many [barometers], and it also has to keep an eye on financial stability,” he said. “I think the only thing that derails the Fed is if we get a catastrophe outside the U.S.”
On Friday, the latest jobs report showed employment growth of an estimated 252,000 positions in December, topping expectations. In addition, the jobless rate fell to 5.6%, but worker earnings unexpectedly dropped 0.2% from November.
While recognizing this “wage puzzle,” El-Erian said the trend “will not keep the Fed on the sideline. I think the Fed is going to look at the holistic improvement in the economy and is going to take this as its cue to start hiking rates — very gradually and with a destination point well below historical averages.”